CEWS update, international tax guidance and CRA updates, including schedule 50 campaign

In this update, we highlight:

• outstanding questions and issues related to the Canada Emergency Wage Subsidy (CEWS)
• new CRA positions on international tax issues created by COVID-19
• updates on the CRA’s work in other areas, including its upcoming letter campaign to improve compliance with T2 Schedule 50 Shareholder Information requirements

Questions and issues on the CEWS

We continue to collect questions from members and others on the recent changes to the CEWS. The CRA has resolved some issues in updates to its Frequently Asked Questions on the CEWS. In our August 20 blog post, we highlighted some key points beyond the basic computation involved in CEWS claims.

We are still waiting for the CRA’s responses on some other key issues, as summarized below.

Paragraph 125.7(4)(d) elections for periods 5 to 9

Where a qualifying employer receives all or substantially all of its revenue from a non-arm’s length party, the employer can elect under paragraph 125.7(4)(d) to effectively use that party’s revenue decline for the 30 per cent revenue test in periods 1 to 4.

However, as the legislation is currently worded, it does not seem to allow the election for periods 5 to 9. The legislation only applies “for the purposes of paragraph (c) of the definition of ‘qualifying entity,’” and that paragraph only applies to the first four qualifying periods.

We asked the CRA to clarify whether the election is available for periods 5 to 9.

Joint election for asset purchases

On an asset purchase, paragraph 125.7(4.1)(e) allows a purchaser to consider revenue earned by the vendor before a sale for CEWS purposes. Where the parties are dealing at arm’s length, they must jointly elect to use this treatment (among other conditions). The current version of the RC661 CEWS attestation form contains a confirmation that the election has been made, but the form does not, by itself, seem to constitute an election.

We have asked the CRA to clarify how the election should be made or provide a specific election form. In the meantime, we recommend that the parties create their own election agreement that specifies which party will recognize the pre-acquisition revenue.

Will the CRA allow qualifying employers to amend choices and elections?

The CRA confirmed that it is considering whether to allow qualifying employers to revise their CEWS-related choices (or elections) if it later turns out that another choice would have been more beneficial. These choices include whether to use the general year-over-year approach or the alternative approach, and whether to use the accrual or cash method for recognizing revenue.

Interaction of the “safe harbour” rule and the elimination of the 14-day test

The definition of “eligible employee” for the CEWS excludes individuals who have received no remuneration from the eligible entity for working 14 or more consecutive days in the period (the “14-day test”). For periods 5 to 9, this condition is eliminated.

For periods 5 and 6, a qualifying employer can use a safe harbour rule that essentially allows them to apply the rules for periods 1 to 4. Although the legislation seems clear, we asked CRA to confirm that the 14-day test does not apply to periods 5 and 6 where the safe harbour rule is being used.

Use of “retail months”

Many retail businesses can have significantly more sales on weekends than they do on weekdays. For various reporting purposes, some retailers may therefore use adjusted monthly periods as part of their normal accounting practices. The goal is to ensure that when comparing one monthly period to other periods, the number of weekends within corresponding periods are consistent. This gives a truer picture of whether the level of business has increased or fallen in a period.

We have asked the CRA whether retailers could use this approach for CEWS purposes. While many retail operations clearly met the 30 per cent test for periods 1 to 4, this answer becomes more important for periods 5 to 9, when sales volume variations and the CEWS amount are more closely linked.

Updated guidance on international income tax issues

As we noted in our recent news announcements, the CRA has extended the application of its COVID-19 international income tax guidance to September 30. The CRA also provided additional guidance on issues from travel restrictions as follows.

Section I-B corporate tax residency

Where a Canadian corporation’s foreign affiliate was, before the COVID-19 travel restrictions, a resident in a designated treaty country for surplus calculation purposes, the CRA has clarified that the affiliate’s residency will not be affected just because a director cannot attend board meetings as a result of the restrictions.

For a foreign affiliate resident in a non-treaty country before the restrictions, the CRA will determine residency on a case-by-case basis. The CRA also stated that the commentary for corporations also applies to commercial trusts.

However, the CRA cautions the central management and control of a corporation and the location of its effective management are determined based on a number of factors, and the location of board meetings is only one of them. The CRA indicates it may still conclude that a corporation is a resident in Canada where the actual management and control of the corporation takes place in Canada, even though the board meetings took place somewhere else.

Section VI non-resident employer certification

Similarly, non-resident employer certifications will not be affected just because travel restrictions have prevented a non-resident employee to return to their country of residence.

To achieve this treatment, the CRA will not count the days during which a non-resident individual works or is present in Canada toward the 45 days worked or 90 days present in Canada for purposes of the definition of “qualifying non-resident employee.”

However, the employer will need to show that:

• it expected the non-resident employee to leave Canada before losing their status as a qualifying non-resident employee
• the non-resident employee returned to their country of residence as soon as they could

To maintain certification, the employer will need to track the number of days the employee worked or was present because they could not leave Canada and the income they earned during these days.

CRA Q&A session on cross-border tax issues

The CRA recently took part in a question-and-answer (Q&A) session on cross-border tax issues related to COVID 19 hosted by the International Fiscal Association (IFA) Canada’s Young IFA Network.

A notable takeaway from the session was the CRA’s indication that, where its COVID-19 international income tax guidance does not specifically deal with an issue, the CRA will take an “object and spirit” approach and be reasonable when evaluating a taxpayers’ position. When exercising this discretion, the CRA will take into account other factors such as the taxpayer’s past record and behaviour.

The CRA encouraged taxpayers and their advisors to contact the CRA with questions about scenarios not covered by the guidance.

Updates on other CRA activities

Schedule 50 letter campaign

The CRA asked us to tell our members about its upcoming campaign to send letters to selected corporations requiring them to provide their Schedule 50 Shareholder Information Form. Schedule 50 tracks ownership of a corporation and is a key component of the CRA’s processes in terms of activities such as risk assessment, gathering business intelligence and carrying out audit work generally. According to the CRA, this schedule is often not completed or is not completed correctly.

The campaign’s goal is to verify the integrity of the information provided in these schedules so they can help taxpayers avoid reassessments, audits, and penalties. In fact, the CRA states that completing Schedule 50 can actually reduce the chances of a potential audit. 

If the Schedule 50 information is found to be incorrect or not filed, the CRA will ask taxpayers about the reasons for the deficiency. This will help the CRA find ways to make the form easier to complete and ultimately improve future compliance.

If a corporation receives one of these letters, it will need to follow its instructions and submit their completed Schedule 50 via Represent a Client, mail or fax. It is important to note that CRA stated specifically that this project will not lead to reassessments, audits, or penalties.

Given this project, we would assume that the Schedule 50 follow-up will become broader over time, so making sure that the form is completed will be important going forward.

CRA meetings by video conference

During the IFA Q&A session, the CRA said they have been given approval to have their agents meet with taxpayers by video conference.

My Business Account (MyBA)

Also at the IFA Q&A session, the CRA noted it has increased the maximum size of file uploads within MyBA to allow taxpayers to upload larger volumes of documentation through the portal.

NOTE: The commentary function of this page has been temporarily closed. Unfortunately, because of the volume of feedback regarding recently announced COVID-19 tax measures, we do not have the capacity to respond to individual inquiries. We strongly encourage you to visit our Federal Government COVID-19 Tax Updates page for information.